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MACD Analysis Trading Signals

Developed & Created by Gerald Appel,

The Moving Average Convergence/Divergence (MACD) remains one of the simplest yet most reliable trading indicators.

It is a momentum oscillator & also a trend following technical indicator.

Construction

The calculation method for this technical instrument involves subtracting one moving average from another, and plotting the result as the 'Fast' line: the subsequent 'Signal' line is then mathematically derived from this 'Fast' line and drawn on the identical panel beneath it.

  • 'Fast' line - Blue Line
  • 'Signal' line - Red Line

The 'standard' configuration for the MACD uses a 12-period exponential moving average (MA) for the 'Fast' line and a 26-period exponential MA, upon which a 9-period exponential MA is overlaid to plot the 'Signal' line.

  • Fast-line = difference between 12 & 26 exponential MAs moving averages
  • Signal Line = MA of this difference of 9-periods

Momentum Oscillator Technical Indicator s - MACD for Scalping

FX Analysis and How to Generate Trading Signals

The MACD indicator is widely used as a trend-following tool, performing best when used to analyze and interpret trending market behaviors. There are three commonly applied techniques for using MACD to generate trade signals:

Forex Cross overs Signals:

Fast line/Signal line Cross-over:

  • A buy trade signal is derived & generated when Fast Line crosses above SignalLine
  • A sell trading signal is derived/generated when the FastLine crosses below SignalLine.

However, in a strong trending market this signal gives a lot of whipsaw fake outs, the best cross over to use would thus be the Zero Line Crossover Signal that's less prone to whipsaw fakeouts.

Zero Line Crossover Signals:

  • When the Fast Line crosses above zero centerline a buy trade signal is generated.
  • when the FastLine crosses below zero center line a sell trading signal is generated.

Divergence Trading:

Identifying divergences between the MACD indicator and the price action can be highly effective in pinpointing prospective points for trend reversals and/or trend continuations in price movement. There are two primary types of divergence setups:

  1. Classic Divergence Trading Setup Signals
  2. Hidden Divergence Setup Signals

Over-bought/Oversold Conditions:

The MACD is also instrumental in pinpointing potential instances where price movement might be overbought or oversold.

These levels and regions are derived & generated if the shorter MACD Lines separate significantly from the median, this is an indication that price action is over-extending and it'll soon return to the more realistic levels.

MACD & MA Cross-over System

This indicator works well when combined with others like the Moving Average crossover system. A strong trading signal arises when both indicators align in their direction.

MACD - Forex MACD Technical Indicator

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